Financing the State of Victoria without Taxes by alendar

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									  Financing the State of Victoria without Taxes
                         A Submission by Prosper Australia
                                        to the
                  Inquiry into State Government Taxation and Debt
                                            October 2, 2009



Introduction and Summary
IF some retirees can live on income from assets instead of burdening the taxpayer,
why shouldn’t the Victorian Government do the same?
    If the Government’s taxing power were a tradeable asset, it would have the same market value as
any other asset portfolio yielding enough income to replace State taxes. If power to avoid the same
taxes were an asset portfolio, it would have the same value. Hence the Government, in exchange for
tax exemptions alone, should be able to acquire enough assets to replace the forgone taxes.
    As the asset “sellers” would avoid not only taxes but also the associated compliance costs and
deadweight costs (opportunities lost because of tax implications), the tax exemptions would fairly
exchange for more than enough assets (or shares of assets) to replace the forgone taxes. In each
exchange, the saving in deadweight costs would be a net benefit that could be shared between the
State and the taxpayer, making the exchange mutually beneficial. Such exchanges can be voluntary;
they will be freely entered into if the law merely permits them.
    For politicians, the best tax reform is an optional reform: “If you don’t like the new system,
you don’t have to vote against it, because you won’t have to be in it.” Opponents of an optional
reform must explain why they want to impose the status quo and deprive the people of choice.
    If the State requires partial equity in assets in return for any tax exemptions, only current owners
will be able to opt out of the tax system. If, instead, the State seeks partial tenancies (or use-rights),
which are “paid out” by the other party in lieu of taxes, then the “other party” can be an owner or a
tenant or sub-tenant, so that all taxpayers can opt out.
    Accordingly we suggest that the State Revenue Office (SRO) be authorized to make a contract
with any entity, whereby the entity shall no longer pay State taxes provided that it grants to the State
   • a negotiated fraction of the tenancy in each assessable asset that the entity occupies, plus
   • a standard fraction of the tenancy in each assessable asset that the entity subsequently occupies,
where
   • an “assessable” asset is one that private entities cannot create or eliminate or remove from Vic-
     torian jurisdiction (the most obvious example being a site—i.e. a piece of ground or airspace,
     including attached building rights but excluding actual buildings), and
   • the entity shall be deemed to occupy any asset that it has a legal right to occupy or use and does
     not let or sublet (e.g., the owner of a vacant and unrented site shall be deemed to occupy it).
This reform is superior to “increased State Government taxation” not only because shared tenan-
cies would eliminate deadweight, but also because desirable infrastructure would pay for itself by
expanding the revenue base without changes in rates or thresholds.
    Site-value rating, which already closely approximates a shared-equity or shared-tenancy scheme,
should be mandated at the municipal level.

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2                                                                                                                                                       Prosper Australia


Contents
1 The requirement of “no losers”                                                                                                                                                             3

2 Requirements related to the Terms of Reference                                                                                                                                           3
  2.1 Property development . . . . . . . . . . . . . .                      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 4
  2.2 Infrastructure . . . . . . . . . . . . . . . . . . .                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 4
  2.3 Competitiveness . . . . . . . . . . . . . . . . .                     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 5
  2.4 Sustainability . . . . . . . . . . . . . . . . . . .                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 6
  2.5 Job security, job creation . . . . . . . . . . . . .                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 7
  2.6 Small businesses . . . . . . . . . . . . . . . . .                    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 7
  2.7 Notes on “land tax” . . . . . . . . . . . . . . . .                   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 8
  2.8 Notes on affordability . . . . . . . . . . . . . . .                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 8
  2.9 Notes on municipal rates . . . . . . . . . . . .                      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 9
  2.10 Notes on debt . . . . . . . . . . . . . . . . . . .                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   . 10

3 Constitutional threats to existing taxes                                                                                                                                                  10

4 Rent in lieu of tax                                                                                                                                                                       11

5 Protecting the revenue                                                                                                                                                                    11

6 Definitions and explanatory notes                                                                                                                                                          12
  6.1 What is an “entity”? . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   12
  6.2 What are “taxes”? . . . . . . . . .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   12
  6.3 Why retain per-unit user charges?         .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   13
  6.4 Who is deemed to “pay” a tax? . .         .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   13
  6.5 What is an “assessable asset”? . .        .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   13
  6.6 What is the “standard” fraction? . .      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   15

7 Positive effect on asset values                                                                            15
  7.1 All taxes come from gross economic rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
  7.2 All deadweight costs come from gross economic rent. . . . . . . . . . . . . . . . . . . . . . . . . 16

8 Specific implementation issues                                                                                                                                                             16
  8.1 Coexistence with the tax system . . . . .                 .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   16
  8.2 Householders, charities, etc. . . . . . . .               .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   16
  8.3 Severance “taxes”, resource rent taxes . .                .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   17
  8.4 Assessing the rent . . . . . . . . . . . . .              .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   17
  8.5 Tax base “competition” . . . . . . . . . . .              .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   17
  8.6 Additional taxes for times of emergency?                  .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   17

9 Advantages for particular interest groups                                                                                                                                                 18
  9.1 Accountants, tax lawyers, realtors, conveyancers . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                18
  9.2 Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                           18
  9.3 States, nations; “historical inevitability” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                         18

10 Recessions and financial crises                                                                                    18
   10.1 Prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
   10.2 Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

11 Conclusion                                                                                                                                                                               19
Financing the State of Victoria without Taxes                                                              3


1       The requirement of “no losers”
If it appears that a proposed tax reform would involve winners and losers, those who expect to be
losers campaign against the reform and its supporters by claiming that others would be losers. The
stridency of such claims is inversely related to their accuracy—why bother campaigning against an
impost that you can simply shift onto someone else?
     Fortunately, tax reform with no losers is not a contradiction. Obviously if a reform is conducive to
economic efficiency, the gains of the winners will outweigh the losses of any losers, so that the winners
would be able to compensate the losers and still have some winnings left over. But there are at least
three methods of reform that are intrinsically free of losers, so that the question of compensation does
not arise.
     The first, and the main subject this submission, is to make participation in the reform optional,
so that those who think they would be worse off in the new system can simply stay in the old one.
Having a choice that one did not have before does not of itself make one a loser.
     The second, which can be characterized as the ultimate extension of grandfathering, is to apply
the new rules only to new entities, e.g. businesses that start up after the new rules are enacted. Entities
created under the new rules cannot be worse off than before, because there is no “before”. This
method can be combined with the first; that is, older entities can be given the option of adopting the
rules for new entities.
     The third is to define the reform in incremental terms—that is, to define changes in tax liabilities
in terms of voluntary changes in taxpayers’ behaviour since the announcement of the reform, so that
taxpayers who “do nothing” pay as if the legislators had done nothing. To deal with entities created
after the announcement, this method needs to be combined with the second.1
    As the Terms of Reference raise the twin spectres of increased taxation and increased debt, we
note that it is also possible to have increased revenue with no losers. Indeed this is the usual
result of economic growth under a static tax system: growth makes a bigger “cake”, so that both
the government and the private sector receive bigger “slices”. But this desirable process can be
accelerated (or, as the case may be, restarted!) by appropriately reforming the revenue base. This
can be done in two ways:
    • If the reform induces the private sector to increase productive activity but still captures some
      consequence of that activity in the revenue net, the public and private sectors share the benefits.
    • If the reform causes certain types of public expenditure to pay for themselves by expanding the
      revenue base, then the public sector gets to spend more money while the private sector retains
      the “after-tax” part of the increase in the revenue base.
The reform suggested in this submission would involve both mechanisms. The expenditures that
would “pay for themselves” would be on infrastructure, including public transport.


2       Requirements related to the Terms of Reference
To eliminate any possible overlap between topics, let us paraphrase the Terms of Reference as follows:
        Effects of increased (i) land tax, (ii) payroll tax, (iii) conveyancing stamp duty, (iv) de-
        velopment levies, (v) other State taxes, (vi) other State charges, and (vii) State debt, on
        Victorian
    1
    Cf. G. R. Putland, “Employment tax credits: the ‘marginal’ approach to full employment”, On Line Opinion,
Mar. 23, 2009; www.onlineopinion.com.au/view.asp?article=8685 .
4                                                                                      Prosper Australia


            (a) development,
            (b) competitiveness,
            (c) sustainability,
            (d) job security,
            (e) job creation, and
            (f) small businesses.

The following subheadings are guided by those in the Terms of Reference, with a few subdivisions
and additions.


2.1    Property development
In so far as “development” means infill or greenfield property development, it is encouraged by hold-
ing charges on sites. Such a charge presses the owner of a vacant or underdeveloped site to develop
or redevelop the site, in order to generate income to cover the charge, or sell the site to someone who
will. If the holding charge is apportioned to the value of the site, the pressure to develop is higher for
more valuable sites, which are more valuable precisely because they are more ripe for development.
The value of the site includes the value of associated airspace and building rights, but not actual build-
ings. If the incentive to develop is to be maximized, the base of the holding charge must not include
values of buildings or other improvements on the site; that is, the charge must not penalize actual
development.
    State “land tax” and municipal rates levied on site value (SV) meet these requirements, as does
any other arrangement whereby the State has partial interests in site values and charges rent thereon.
Municipal rates on the capital-improved value (CIV) or net annual value (NAV) do not meet the
requirements.
    All other existing State taxes are hostile to this sort of “development”. In particular, payroll tax
increases the cost of necessary labour, while conveyancing stamp duty inhibits the transactions that
are needed to bring sites into the hands of developers, redevelopers and final users.


2.2    Infrastructure
In so far as “development” means public investment in infrastructure, it is encouraged by taxes or
charges that recover some of the uplifts in site values caused by the infrastructure. According to the
market, the benefit of an infrastructure project is worth whatever people decide to pay for it. But what
they pay has two components: (i) the charges for actual use of the service provided (fares, tolls, fees,
etc.) and (ii) the price of access to locations where the service is available, as opposed to locations
where it is not: “Location, location!” The latter component, which is the benefit net of user charges, is
manifested as uplifts in site values—not values of buildings, which are limited by construction costs,
but values of space, because space has location, and therefore locational value, even if no buildings
yet occupy it. Hence the cost-benefit ratio of an infrastructure project, where the “cost” is also net of
user charges, is simply the cost-uplift ratio. If the “tax” system claws back a certain fraction of every
uplift in land values, any public infrastructure project whose cost-benefit ratio does not exceed that
fraction is self-funding or better than self-funding. The remaining (“after-tax”) portion of the uplift is
a net windfall for the property owner.
    State “land tax” is suitable for clawing back some of the uplifts due to infrastructure—provided
of course that the thresholds and marginal rates are left well alone, and are not adjusted every time
property owners claim that they are suffering because their assets have risen in value! In truth, their
“tax” bills do not increase unless their site values do, and their site values do not increase unless, in
Financing the State of Victoria without Taxes                                                                           5


the judgment of the market, they are better off in spite of the “tax” implication. Indeed, they would be
better off if the marginal “land tax” rates were higher, because this would cause more infrastructure
projects to become self-funding, so that more projects would proceed, delivering more windfalls to
property owners. For the same reason, ordinary home owners would be better off if the “land tax”
base were broadened by including owner-occupied residential sites. In each case, if the new or higher
rate were applied only to future increases in site values, there would be “no losers” in the transition.
    That said, other methods of implementation might make the benefits for property owners more
obvious, and might therefore be more politically acceptable. One such method is to give site owners
the option of ceding partial interests in their sites to the State, in return for tax exemptions. Owners
taking up this option would give the State an incentive to add value to their site(s).
    Existing State taxes other than “land tax” are woefully inefficient at clawing back uplifts in site
values due to infrastructure. Even development levies and the GAIC, which are ostensibly levied for
the purpose of financing infrastructure, and which are ostensibly justified by uplifts in property values
do to rezoning and public provision of infrastructure, are not explicitly levied on or apportioned to
the said uplifts.
    The situation would be much improved if all existing taxes on property transfers, including stamp
duty, development levies and the GAIC, were replaced by a single transfer charge payable by the
vendor and proportional to the real increase in the site value since acquisition,2 with a deduction
for any expenses incurred by the vendor in contributing to the uplift (e.g. infrastructure provided by
developers between developed residential lots, contributing to the location values of those lots). The
modified transfer charge would not only facilitate and encourage public investment in infrastructure,
but, unlike existing transfer taxes, would be guaranteed not to turn an otherwise profitable purchase-
resale cycle into a loss-maker. All this should appeal to property owners and their lobbyists and should
therefore be “politically acceptable”. To avoid any charge of retrospectivity, vendors who acquired
their properties before the change could be given the option of paying tax as if they had sold and
bought back their properties on the last day before the change, so that the new charge would apply
only to the uplift in the site value since the change.
    Public-Private Partnerships (PPPs) do not solve the infrastructure problem, because private own-
ers, operators and financiers have little or no ability to recover uplifts in land values. So they try to
cover capital costs entirely from user charges, which are therefore too high, causing low patronage,
which may prevent recovery of costs—unless taxpayers come to the rescue. Low patronage defeats
the purpose of the service, while taxpayer-funded subsidies, guarantees or bailouts defeat the alleged
purpose of private finance.

2.3     Competitiveness
Residential and commercial tenants routinely pay 100% of the rental values of their sites to their
landlords, and no landlord has ever suggested that this damages the State’s competitiveness! On the
contrary, it obliges the tenants to use the sites productively in order to pay the rent. If only a fraction of
the rental value of the site were payable to the landlord, the remaining fraction would be capitalized
into a lease-transfer price, so that the occupant would pay the former fraction directly, and pay or
   2
     Contrary to superficial appearances, this proposal would not amount to a shifting of the existing stamp
duty from buyers to sellers. The obvious reason is that the seller will avoid tax on any subsequent purchase.
But the fundamental reason is that any such “shifting” is done by the market. If a transfer charge is payable by
the seller, the seller will want to add it to the price. If it is payable by the buyer, the buyer will want to subtract it
from the price. In the end, the charge will be shared between the seller and buyer in inverse proportion to their
bargaining power, regardless of who nominally “pays” it. But if the transfer charge depends on the increase
in the site value since acquisition, it is convenient to make it payable by the seller simply because the seller
already knows the value at the time of acquisition.
6                                                                                       Prosper Australia


forgo the latter fraction under the guise of interest on the transfer price. The division into “rent” and
“interest” would have no effect on total operating costs, hence no effect on prices, hence no effect on
competitiveness. Similarly, if a fraction of the rental value of a site is payable to the State as “land
tax”, only the remaining fraction is capitalized into the “price” of the site and paid or forgone as
interest on that price, and only that fraction is “bought” outright by the “owner” of the site. As long
as the “tax” is levied on the “price” of the site, it cannot take the whole rental value, because if it did
there would be no “latter fraction” to be converted into the “price”. Thus what is called “land tax” is
in substance a shared-equity scheme, in which the private partner buys its share and pays rent on the
public partner’s share, or a shared-tenancy scheme, in which the private owner buys less than the full
use-right and compensates the public co-tenant for the remainder of the use-right. Thus “land tax”
has no more effect on prices of goods and services, and is no more damaging to competitiveness, than
any other system of shared interests—e.g. a partnership or joint-stock company.
    Complaints about “land tax” rates being “uncompetitive” are designed to obscure the fact that land
is immobile and therefore not subject to tax competition. However heavily the land of Victoria is
“taxed”, not one square metre of it will flee across the border into NSW or South Australia. Potential
buyers of land may take their money elsewhere, but in so doing they make the land cheaper for others;
and what the others save on the land itself, they can spend on capital and labour to make the land
productive. As the land stays put, someone must end up owning it, and the eventual owner must use it
to generate sufficient income to pay the “tax” on it, or find a tenant whose “rent” will cover the tax, or
find a buyer. The need for tenants and buyers enhances their bargaining positions relative to landlords
and sellers, making accommodation more affordable. So the landlords and sellers and their lobbyists
campaign against “land tax”—by pretending that it makes accommodation less affordable!
    All other existing State taxes damage competitiveness. Payroll tax feeds into prices of goods and
services produced in Victoria and consequently deters production in Victoria. Conveyancing stamp
duty, by impeding reallocation of property needed for production, likewise raises prices of Victorian
products. Development levies, not being strictly apportioned to unearned uplifts in site values, can
have the same effect, although they are perhaps more applicable to residential sites than to sites used
for production. Fire levies on building-insurance premiums amount to taxes on buildings, including
buildings needed for production, and therefore impede production and raise prices.
    (Buildings, unlike land, are not quite “immobile” for tax purposes. While most buildings cannot
be moved across State borders without prohibitive expense, private agents can respond to taxes on
buildings by choosing to build in one State rather than another. In the long term, the effect of such
decisions is much the same as if buildings themselves could flee across State borders.)
    It is worth noting that fire levies, like “land tax”, are recurrent charges paid by property owners.
Hence it might be politically feasible to eliminate fire levies in favour of increased “land tax” receipts.
This would enhance competitiveness without offending property owners as a class, although there
would be winners and losers within that class.


2.4    Sustainability
The Committee will undoubtedly receive submissions alleging that sustainability requires limits on
population growth. Be that as it may, the policies that influence Victoria’s population are determined
mainly at the Federal level. As this submission is addressed to State legislators, it treats population
growth as “given”. And for a “given” total population, sustainability is roughly synonymous with
compactness of urban areas.
    New suburbs make new environmental footprints. The same is not true of increasing density in
established suburbs. The redevelopment of a residential site to house a larger number of people is an
opportunity to exploit new technology so as to reduce the environmental footprint per person. The
Financing the State of Victoria without Taxes                                                             7


overall footprint may not increase; and if it does, the increase will be less than if the same increase
in population had been accommodated in a new suburb, because the latter option does not involve the
replacement of existing environmentally unfriendly structures.
    More compact cities mean shorter commuting distances, hence shorter commuting times, hence
fewer vehicles on the road at any one moment, hence less pollution (and fewer accidents and more
family time).
    Population density (for a given total population) varies as the inverse square of the linear dimen-
sions. But when commuting times are allowed for, the density (i.e. the number per unit area) of
moving commuters is more like the simple reciprocal of the linear dimensions. So traffic density
does not rise in full proportion to population density. The picture improves further if we understand
“traffic” in terms of vehicles, especially powered vehicles: as the linear dimensions are reduced,
more commuters can walk or cycle to their destinations, and it becomes feasible (even without the
tax reforms proposed herein, but especially with them) to provide public transport within walking or
cycling distance of a larger percentage of the population. As public transport carries more persons per
vehicle than private transport and uses each vehicle for a larger fraction of the time, it has a smaller
environmental footprint per passenger-km, compounding the benefit of fewer passenger-km due to
shorter commuting distances and the feasibility of walking and cycling.
    Encouraging compactness means encouraging high-intensity development of the best located, i.e.
most valuable, sites. Further encouraging investment in public transport means clawing back uplifts in
site values. Thus the requirements of sustainability are synonymous with those of property develop-
ment and infrastructure, considered above. “Land tax” meets the requirements, as does any proposed
arrangement whereby the State claims partial interests in site values. Other existing State taxes do
not.


2.5    Job security, job creation
In so far as existing taxes deter development and/or neglect infrastructure and/or damage competitive-
ness, they endanger existing jobs and impede the creation of new jobs. As already noted, “land tax”
and other shared-equity or shared-tenancy schemes are innocent on all counts, whereas other existing
State taxes are guilty on all counts.
     But payroll tax is most worthy of opprobrium. Defenders of payroll tax claim that it is passed on
in prices and is therefore equivalent to a consumption tax, like the GST. This argument conveniently
considers only the downstream shifting of taxes. But when demand for inputs is elastic, taxes are also
shifted upstream. When payroll tax and GST and shifted downstream, they indeed tax consumption.
But when GST is shifted upstream, it taxes production, whereas when payroll tax is shifted upstream,
it taxes employment—as all employers, broadcasters, barbers and taxi drivers know!
     To the extent that payroll tax feeds into prices, it adds to inflationary pressures and therefore raises
the so-called natural rate of unemployment, which is the minimum unemployment rate that causes
enough wage restraint to give stable inflation. The central bank adjusts interest rates so as to maintain
unemployment at this “natural rate”. So payroll tax not only creates unemployment, but influences
monetary policy so as to entrench unemployment.


2.6    Small businesses
Small enterprises need affordable premises and therefore gain from a plentiful supply of commercial
rental accommodation. The above remarks concerning property development [subsection 2.1] and the
bargaining positions of tenants [subsection 2.3] are again applicable. Again “land tax” scores well,
8                                                                                           Prosper Australia


as does any proposed system of shared equity or shared tenancy in sites, while other State taxes score
badly.
    It is sometimes said that payroll tax, because of its threshold, is the only tax that discriminates
in favour of small business relative to big business. This is a polite way of saying that payroll tax is
the only tax that deters small businesses from growing larger. Big business is undoubtedly pleased
with this arrangement. The main deterrent to growth consists not in the tax itself, which applies only
to the margin by which one’s payroll exceeds the threshold, but rather in the compliance cost, which
imposes its full weight as soon as the threshold is reached, but amounts to a shrinking fraction of
turnover as the business grows. Again, big business must be pleased.
    Of course, in view of the contribution of small business to the overall demand for labour, what
is said under the “Small business” heading could almost as well be said under “Job security, job
creation”.


2.7    Notes on “land tax”
As “land tax” is in substance a shared-equity or shared-tenancy scheme [see subsection 2.3], it cannot
fairly be described as a tax on land per se, or even land values per se. However, because the “tax unit”
is not the site but rather the owner, and because the threshold and/or progressive rates apply to the
aggregate value of sites held by the owner, “land tax” can fairly be described as a tax on aggregation.
If the “tax unit” were the site and/or the rate were flat with no threshold, there would be no tax penalty
on aggregation.
     It can also be said that “land tax” is a tax on particular uses of land in that, for example, it applies
to rented residential sites but not owner-occupied residential sites. Hence it induces sales of rental
homes to owner-occupants and reduces the supply of homes to let, leading some commentators to
claim that the selective application of land tax raises residential rents. This claim forgets that the
same sales also reduce the demand for rental homes by turning renters into owner-occupants. But
even if the claim were true, it only means that rents are higher than they would be if land tax were
extended to owner-occupants. It does not mean that rents are higher than if there were no “land tax”
at all; on the contrary, the “tax” makes it harder for owners to tolerate vacancies and therefore tends
to reduce rents.
     A sales tax can be shifted onto the buyer because the tax is a cost of selling. But “land tax” cannot
be shifted onto the tenant, because it is not a cost of letting. As the sales tax on an item is not payable
until the item is sold, and as a delay in the sale has little effect on the return to the seller, the seller can
easily hold out until someone offers a sufficient price to cover the tax. In contrast, because the “land
tax” on a vacant site is payable whether the site is let or not, and because the landlord is losing rent
while the site remains unlet, it is neither so easy nor so profitable to hold out for what is deemed to be
“sufficient” rent.
     This much is well understood by landlords and their lobbyists, who therefore campaign against
“land tax” by claiming that they can do exactly what they cannot do: add the tax to the rent! To the
extent that they “succeed” in this campaign, they sabotage the most efficient existing mechanism by
which the State can finance infrastructure projects that increase site values for the benefit of owners.
Thus they reap the just reward for their mendacity.


2.8    Notes on affordability
Does the claimed uplift in site values due to infrastructure contradict the claimed improvement in
affordability? No, because affordability is a matter of competition—specifically, competition among
owners seeking tenants or buyers. Affordability is inversely related to rents or prices, but directly
Financing the State of Victoria without Taxes                                                        9


related to the spending power of prospective tenants or buyers, and to the amenity of the accommoda-
tion. The balance between those competing influences is determined by competition. Holding charges
on site values, including rents payable under any shared-tenancy contracts, facilitate the provision of
infrastructure, which improves amenity and therefore raises property values. But the same holding
charges also make owners more determined to attract tenants or buyers, improving affordability as
defined in terms of competition: the competition forces landlords and sellers to share some of their
gains with tenants and buyers.
     In short, the increases in prices and rents due to infrastructure are more than offset by improved
amenity, and do not compromise the claim of improved affordability.
     Improved affordability has implications for an earlier claim: if owners must share some of their
gains with renters and buyers, then not all of the benefit of infrastructure will show in site values
as measured by market rents and prices, so that the observed “uplift” will be somewhat less than
the benefit. On the other hand, the removal of deadweight presumably increases multiplier effects
and thereby improves the conversion of infrastructure into measurable amenity. Thus we need not
conclude that improved affordability compromises the mechanism for financing infrastructure. Even
if it does, the effect is merely to lower the maximum cost-benefit ratio of a self-funding project, or
to raise the “clawback” needed to make any particular project self-funding; at worst, the difference is
one of degree.

2.9   Notes on municipal rates
Although this Inquiry is about “State” taxes, municipal rates and charges are relevant in that:
   • they are governed by State legislation;
   • their effects are within the Terms of Reference; and
   • they indirectly influence State revenue.
    CIV and NAV rates fall partly on values of buildings and other improvements, and are therefore
hostile to development. To the extent that they do not fall on site values, they fail to encourage
investment in infrastructure. These faults imply failure under all criteria in the Terms of Reference.
By discouraging development and redevelopment, CIV and NAV rates reduce State revenue from
stamp duties and payroll tax. By taxing values of buildings, CIV and NAV rates invite neglect of
existing buildings, reducing the values of surrounding sites, hence State revenue from stamp duties,
“land tax”, and any existing or proposed form of shared equity or tenancy in sites. If the State cannot
afford to tolerate tax avoidance or tax evasion, neither can it afford to tolerate municipal rating
schemes that erode the State revenue base.
    In contrast, SV rating resembles a “land tax” with a flat rate, no threshold, and minimal exemp-
tions, and therefore closely approximates a harmless shared-equity or shared-tenancy scheme (except
that the marginal rate is not fixed, but is calculated by working backwards from the total revenue
required in the Council’s budget).
    We therefore submit that SV rating should be mandated, and that any municipal “service charges”
that amount to de facto taxes on buildings (e.g., charges of so much per year per dwelling, or per some
other unit whose presence is correlated with that of a dwelling) should be subject to a limit like that
presently imposed on the “municipal charge” [Local Government Act, s.159].
    The political pain caused by changes in the rating base can be minimized by explicitly allowing
Councils to cap annual increases in bills. As the same caps would apply to increases caused by
periodic revaluations, the overall volume of dissatisfaction with increases in bills would be less than
under present arrangements, notwithstanding the changes in the rating base.
10                                                                                         Prosper Australia


    Caps on increases in rates bills should be decided by Councils. They should not be imposed by
the State, lest they unduly constrain the ability of Councils to fund necessary services (as allegedly
happens in NSW).



2.10      Notes on debt
For a government, as for a household, it is prudent to incur debt in order to acquire an asset that will
reliably generate more than enough income or savings to retire the debt within the lifetime of the
asset.
    If a government incurs debt in order to finance an infrastructure project, the ability to retire that
debt within the service life of the infrastructure (or any desired shorter time) depends on the efficiency
with which the revenue system captures uplifts in site values. The inefficiency of the present tax
system in capturing such uplifts explains the neglect of infrastructure by successive governments.
And the limited ability of private agents to capture such uplifts explains why PPPs have not solved
the problem.



3        Constitutional threats to existing taxes
Under s.90 of the Australian Constitution, only the Commonwealth may impose duties of excise.
Victoria’s duties on registrations of new motor vehicles and sales of livestock clearly fall with the
definition of “duties of excise” accepted by the High Court in Ha v. NSW (1997), and earlier cases.3
Unless the High Court does a volte-face,4 neither duty will survive a constitutional challenge.
    To the extent that payroll tax, conveyancing stamp duties, development levies and fire levies
feed into prices of goods, they arguably amount to duties of excise. The effect on prices of goods is
especially clear in the case of payroll tax. Moreover, because payroll tax preferentially raises prices
of goods produced within the State, it acts as a reverse tariff and is therefore likely to be ruled
unconstitutional whether the High Court does a volte-face or not.5
    Anyone carrying a criminal conviction for non-payment of an unconstitutional tax would seem to
be entitled not only to have the conviction quashed, but also to have every related indictment, charge,
arrest or warrant declared null and void for want of valid subject-matter, and to be substantially
compensated. Presumably the Constitution trumps any statute of limitations, including any statute
purporting to impose time-limits on criminal appeals. And obviously the State could not escape
liability by reason of ignorance of the law! The more interesting question is whether public officials
who have collected unconstitutional taxes are guilty of criminal fraud, in which case they too would
be unable to plead ignorance. Meanwhile, anyone who has paid an unconstitutional tax is free to sue
for a refund, or to use the possibility of such a suit as leverage in any other dispute with the State.
The Constitution is not to be trifled with.

     3
      P. Sampathy “Section 90 of the Constitution and Victorian Stamp Duty on Dealings in Goods”, Jour-
nal of Australian Taxation, Vol. 4, no. 1 (2001), pp. 133–155; www.buseco.monash.edu.au/blt/jat/2001-issue1-
sampathy.pdf .
    4
      Cf. G. R. Putland, “Wake up, Australia: Stamp duties on new cars are illegal” (blog post), Aug. 16, 2009;
http://tribune.grputland.com/2009/08/wake-up-australia-stamp-duties-on-new.html .
    5
      Cf. G. R. Putland, “Payroll taxes levied by Australian States are probably unconstitutional” (blog post),
Sep. 5, 2009; http://tribune.grputland.com/2009/09/payroll-taxes-levied-by-australian.html .
Financing the State of Victoria without Taxes                                                          11


4    Rent in lieu of tax
The legislative embodiment of a voluntary shared-tenancy system in Victoria would be unusually
simple. The essence of it would be contained in a single paragraph to the following effect:

      (1) Notwithstanding any other law made by this Parliament with respect to taxation, it
      shall be lawful for the SRO to enter into a contract with any entity, whereby the entity
      shall no longer pay taxes to the State provided that the entity grants to the State

            (a) a negotiated fraction of the tenancy in each assessable asset that the entity
            occupies, plus
            (b) the standard fraction of the tenancy in each assessable asset that the entity
            subsequently occupies.

Obviously it is intended that the State will receive rent for its tenancy fractions (as compensation for
not exercising the rights of a co-tenant), and that the rent will replace the forgone taxes. One definition
can be given immediately:

      (2) For the purposes of paragraph (1), the entity shall be deemed to occupy any asset
      (or portion thereof) that the entity has a legal right to occupy or use and does not let or
      sublet.

Other terms, including “standard fraction” are yet to be defined.


5    Protecting the revenue
Paradoxically, the strongest safeguard against net loss of State revenue through tax/rent exchanges is
the mere fact that such exchanges would be voluntary. As the SRO would not be obliged to contract
with any particular taxpayer, it would not need to accept any arrangement involving a risk of lost
revenue.
    For this reason, the enabling legislation need not foresee every issue that might arise, but could
leave most issues to be resolved in the contracts. And because the benefits of experience gained from
early contracts would appear in later contracts far sooner than they could appear in any legislative
amendments, the enabling legislation need not include elaborate “anti-avoidance” measures of the
sort commonly found in tax laws; if the SRO smells a rat, it simply won’t accept the deal. The
only “anti-avoidance” provision needed in the legislation would a brief, broad statement such as the
following:

      (3) In assessing any proposed contract under paragraph (1), the SRO shall give
      paramount consideration to the protection of State revenue, net of expenses incurred in
      the collection thereof. In particular, the SRO may:

            (a) require that the entity dispose of or fully utilize certain assets before the
            contract takes effect;
            (b) require that related entities be included in the contract or conclude sepa-
            rate contracts.

      But when any such contract is in force, the entity shall have the controlling interest in
      each affected tenancy, even if the entity’s numerical share of the tenancy is less than
      50 percent.
12                                                                                     Prosper Australia


By judicious use of such terms and conditions, the SRO could prevent a taxpayer from (i) avoiding
transfer taxes (if applicable) on imminent sales of assets, (ii) hoarding assets, failing to conduct tax-
able business with them in order to negotiate low State tenancy fractions on exit from the system,
and then selling the assets, or (iii) remaining in the tax system while conducting taxable business
through a related entity that has opted out on favourable terms. For added security, clause (a) refers
to “assets”, not “assessable assets”. But the “controlling interest” ensures that when the bargain is
eventually struck, the former taxpayer’s freedom is not compromised. The “even if” is unlikely.


6     Definitions and explanatory notes
6.1    What is an “entity”?
      (4) In this Act, an entity is a natural person or other legal person.

Note that an “entity” need not be domiciled in Victoria or even Australia and need not yet pay tax
to Victoria. Thus, for example, a foreign corporation could sign a shared-tenancy contract in antici-
pation of commencing business in Victoria, and become a contributor to State revenue without ever
interacting with the tax system as we know it.


6.2    What are “taxes”?
For present purposes, taxes include all payments to the Executive Branch except fines, proceeds of
sales of goods and assets, and per-unit user charges. The standard distinction between taxes and
charges, namely that charges are requited while taxes are not, is generally followed. For example,
royalties for fishing, logging, mining or drilling, whether “specific” (apportioned to quantity) or ad
valorem (apportioned to value), are per-unit user charges (being payments for depletion of resources
owned by the people); but annual “fees” for mining and logging licenses are taxes in so far as they
exceed the State’s associated costs, as are annual “fees” for vehicle registrations. Water/gas/electricity
consumption tariffs are per-unit user charges; but annual fees for “connection” to such services, if
payable to a government, are taxes (because any expense incurred by the provider of the “connection”
is one-off, not annual). A parking fee levied on a motorist for parking on a public street for a limited
time is a per-unit user charge; but a parking-space levy paid by a private property owner who provides
parking on his/her own property is a tax. These examples have been chosen because they are on the
borderline; most cases are more obvious. The prevalence of official euphemism is also helpful: if it’s
officially called a tax, it’s probably a tax.
    The last remark applies to “land tax”, not because it is a true tax, but rather because we envisage
that “land tax” would be replaced by any voluntary shared-tenancy arrangement. But some apparent
“user charges” are also worthy of replacement, and could be described as taxes on the ground that
they exceed reasonable costs (as we shall see). Because of cases like these, perhaps the safest way to
define “taxes” in the enabling legislation would be to list them by name:

      (5) In this Act, taxes include:

            (a) . . .

The laws imposing the taxes could also be cited, if needed for clarity. That would deal with current
taxes. To allay any fear that the contracts will be undermined by new taxes, the list would probably
need to end with a catch-all item like:
Financing the State of Victoria without Taxes                                                            13


      (..) other sources of State revenue subsequently enacted by this Parliament (excluding
      fines, proceeds of sales of goods and assets, and per-unit charges on users of services).


6.3    Why retain per-unit user charges?
Service charges can be defended as a means of rationing the use of services. Economic theory tells
us that the use of a service will be socially optimal if it is priced at the marginal cost, i.e. the cost of
providing the next unit of service—not to be confused with the fixed cost, which is incurred regardless
of utilization, or the average cost, which is the total cost (including the fixed cost) divided by the
number of units provided.
    At present, some apparent user charges, notably including road/bridge tolls and public transport
fares, are substantially above marginal costs. Hence it is arguable that such “charges” should be
treated as taxes and consequently waived for entities that accept shared-tenancy contracts. These
entities would contribute to the cost of infrastructure through the partial rents that they pay on sites—
provided, of course, that sites are “assessable” assets.


6.4    Who is deemed to “pay” a tax?
For present purposes, to “pay” a tax is to remit it to the SRO, not merely to pay a price inflated by
tax remitted by the vendor or someone further up the supply chain. To avoid doubt, the enabling
legislation could say something like:

      (6) For each type of tax, for the purposes of paragraph (1), the party deemed to pay the
      tax shall be the party responsible for the final settlement of the account with the SRO.

Or the parties that “pay” could be listed along with the taxes.
    From paragraphs (5) and (6), taxpayers can work out what taxes they would avoid by accepting
shared-tenancy contracts. For each tax they would avoid not only the tax itself but also the associated
compliance cost, which is the cost (in cash or kind) of calculating tax obligations and maintaining
the necessary records, and the associated deadweight cost, which is the value of opportunities lost
because otherwise viable transactions or projects are rendered unviable by the tax and/or its compli-
ance cost (although the apportionment of costs between entities is more problematic for deadweight
costs than for compliance costs).


6.5    What is an “assessable asset”?
For a typical individual taxpayer, the only assessable asset will be the site of one’s residence. For a
typical small enterprise, the only assessable asset will be the site of one’s business premises. Having
answered the question for most taxpayers, let us now explain the underlying principles and give
further examples.
    If every taxpayer under Victorian jurisdiction accepts a shared-tenancy contract, the State will
thereafter derive revenue only from shared rents of assessable assets. If those assets do not subse-
quently appreciate at least in proportion to the State’s revenue requirements, then the State will have
to choose between cutting services (politically difficult, if not unconscionable), breaching the con-
tracts (politically suicidal, if not unconstitutional), and inflating user charges above marginal costs
(economically inefficient). If only some taxpayers accept contracts, any shortfall in revenue from
shared tenancies will impose an unfair burden on the remaining taxpayers, who, if they then opt out
of the tax system by accepting contracts, will do so on less favourable terms than their predecessors.
14                                                                                       Prosper Australia


    If such adverse outcomes are to be avoided, the assets classified as “assessable” must be such that
they appreciate in response to economic growth. That requirement is met by the following definition:

      (7) In this Act, an assessable asset is an asset which is inside Victoria or otherwise un-
      der its jurisdiction, and which no entity can replicate, eliminate, or remove from that
      jurisdiction.

If assets outside Victoria were assessable, that would create “double taxation” issues when other states
inevitably followed Victoria’s lead. If “assessable” assets could be destroyed or otherwise eliminated,
they might not appreciate collectively, and entities under contracts would be able to avoid State rent
payments by destroying the assets (or failing to maintain or replace them). If “assessable” assets could
be freely replicated, they would fail to appreciate individually, because any such appreciation would
induce additional production, which in turn would devalue the existing stock. Worse, production by
entities that are still in the tax system would devalue assets held by entities under contracts, causing a
loss of State revenue. But if “assessable” assets cannot be freely replicated, the increase in effective
demand for such assets (caused by economic growth) cannot induce an increase in supply, but is
reflected in increasing rents and prices.
    It is clear that under the above definition, assessable assets exclude buildings, plant and equipment,
and goods and chattels.
    The most obvious type of asset that private entities can neither replicate nor eliminate is space,
which is divided into sites, which are defined in terms of location and therefore cannot be moved out
of Victoria’s jurisdiction, which itself is defined in terms of location. By conferring additional rights
on the use of space, governments can add value to sites or effectively create sites (as when building-
height limits are increased); but private entities cannot do these things. Growth of the local economy
can also add value to sites; but a single private entity (unless it is freakishly large) cannot significantly
drive that growth. Moreover, sites are especially suitable for shared-tenancy contracts because every
taxable entity must occupy a site. We may therefore consider sites as the archetypal, quintessential
“assessable” assets, and all other assessable assets as site-like.
    Licenses satisfy the definition of “assessable” provided that they are strictly limited in supply
and that their use is confined to Victoria. Taxi licenses (also known as plates) satisfy this definition.
Ordinary drivers’ licences do not, because they are not limited in supply. Other licences that must be
or can be limited in supply include gambling licenses, water rights, fishing/logging/mining/drilling
rights, easements and rights of way, and seaport time slots.
    A monopoly is the extreme case of a limit on the number of licenses: just one license. Not all
monopolies are created by governments. A networked service is by nature a monopoly—a natural
monopoly—because any competitor wanting to sign up its first customer must either replicate the
network (for one customer?) or connect to the existing network. Even if the existing network was
initially created by one private entity, it cannot realistically be replicated by another; and because
such a network has a spatial dimension, its “creation” requires other assessable assets such as sites,
easements, and rights of way.
    To ensure that all assets that need to be “assessable” are indeed assessed, the enabling legislation
could say something like:

      (8) At the time of commencement of this Act, for the purposes of paragraph (7), assessable
      assets shall include, without limitation: . . .

Then would follow a list. The phrases “At the time of commencement. . . ” and “without limitation”
leave open the possibility that the list may grow in response to technological or constitutional change.
A late addition to the list would not cause any sudden change in rent payments, because no rent would
Financing the State of Victoria without Taxes                                                           15


be payable on a newly assessable asset until the next transfer of tenancy [see paragraph (1), especially
clause (b)]. Neither would it cause a sudden change in resale values, because the reclassification of
an asset type would be anticipated and “priced in” long before implicit assessability became explicit.


6.6    What is the “standard” fraction?
Because the standard fraction would apply only to tenancies commencing after the occupants opted
out of the tax system, it would not be critical in taxpayers’ decisions to opt out or for short-term
adequacy of revenue. But, to answer the question, the enabling legislation would say something to
the effect:

      (9) The standard fraction shall be X percent, unless a lower percentage is fixed by reg-
      ulation, in which case change in such regulation shall be subject to disallowance by
      Parliament.

In practice, the standard fractions would be initially set at X percent, but would tend to fall in the long
term because the values of assessable assets would tend to grow faster than revenue requirements.
Therefore the limit X would tend to become entrenched: in theory it could be increased by amend-
ing the legislation, but in practice it would take an extreme emergency to make any such increase
politically acceptable.
    For these reasons, X would affect adequacy of revenue in the medium term rather than the short
or long term. To be safe, X could be set as the total tax currently paid to the SRO by occupants of
assessable assets, expressed as a percentage of the total rental value of the assets.

  The outline of the enabling legislation (indented and italicized) is now complete. The Committee
may compare its complexity with that of any existing piece of tax legislation.



7     Positive effect on asset values
7.1    All taxes come from gross economic rent.
Because assessable assets cannot be produced by private agents, the returns on such assets cannot
serve as incentives to produce the assets; that is, the returns are economic rent.
    From the viewpoint of the taxpayer, the supply of assessable assets in Victoria is fixed. For ex-
ample, the overall supply of land is fixed, as is the supply of land legally usable for any particular
purpose, or within acceptable distance of any particular services, infrastructure, or markets. Yet ac-
cess to some sort of assessable asset is essential to life and livelihood. For an wage-earner per se,
the one essential assessable asset is a residential site. For a retailer per se, it’s a commercial site.
For a taxi driver per se, it’s a plate. But for every economic agent, securing access to some part of
that limited pool of assessable assets is a prerequisite for economic participation. Therefore rents and
prices of assessable assets are bid upward until they absorb the economy’s capacity to pay. As all
taxes are deductions from that capacity, all taxes are ultimately borne by the owners of assessable
assets as deductions from their gross (pre-tax) economic rents. It follows that if all taxes were levied
directly on assessable assets, the owners would be no worse off; that is, their net (after-tax) economic
rents would be undiminished. Hence, in a rational market, the transfer prices of the assets, i.e. the
discounted present values of their anticipated net economic rents, would also be undiminished.
16                                                                                    Prosper Australia


7.2   All deadweight costs come from gross economic rent.
The margin by which taxes reduce the capacity to pay for assessable assets, and hence reduce the
values of the assets, includes not only the taxes themselves but also their deadweight costs. Thus we
may think of deadweight as the margin by which asset owners are overcharged.
    Unlike taxes, rent shares payable by occupants would not deter any productive activities carried
out in the course of tenancy, but rather would make such activities all the more necessary as means
of paying the rent. Thus the negative effect of deadweight on asset values would be eliminated; the
owners would no longer be overcharged.
    In practice, in the negotiation of each shared-tenancy contract, the saving in deadweight costs plus
compliance costs would be a net benefit to be divided between the taxpayer and the State, making the
contract mutually beneficial. For the purpose of computing the economy-wide effects of these savings,
the per-contract savings in compliance costs are additive only in so far as they are incurred in kind,
because a cost incurred in cash is a benefit to the payee; but the perceived savings in deadweight costs
are better than additive, because individual traders suffer deadweight not only because of their own
tax liabilities but also because of others’ liabilities.



8     Specific implementation issues

8.1   Coexistence with the tax system
Entities under shared-tenancy contracts would no longer remit indirect taxes (including payroll tax),
but would still bear any indirect taxes hidden in prices that they pay—although those hidden taxes
would be reduced as other entities opted out of the tax system and consequently stopped remitting
indirect taxes.
    If an entity ceases to pay a certain State tax, it ceases to be eligible for deductions against the
associated tax base and for offsets against the tax payable. For each tax, that outcome is probably
guaranteed by existing legislation.
    If an existing tax has exemptions for certain entities, the governing legislation or regulations or
case law will contain any necessary rules concerning transactions between a taxed entity and an
exempt entity. Again, the existing law will probably imply that the same rules apply if the “exempt”
entity is exempt by reason of having opted out of the tax system.



8.2   Householders, charities, etc.
A householder who opted out of the tax system would enjoy (e.g.) discounted car registration and
free use of public transport and tollways, but would cede a partial tenancy in the home site. The
rent required to “pay out” that partial tenancy would increase with the value of the site. In case this
increase is not matched by an adequate increase in income, the householder, if an owner, could be
allowed to defer any increment in the rent payable for the State’s co-tenancy until the property is sold
or otherwise transferred. Renters, of course, would not have this option; but neither do they have it in
respect of their normal rent, which is a much bigger problem.
    Similar concessions are possible in respect of sites used for educational, charitable, or religious
purposes.
Financing the State of Victoria without Taxes                                                           17


8.3    Severance “taxes”, resource rent taxes
As noted above, specific or ad-valorem charges for fishing, logging, mining or drilling, although
sometimes misnamed “severance taxes”, are properly called royalties rather than taxes. (Indeed, if
they were taxes they would be excises and therefore forbidden to the States!) Not being taxes, they are
implicitly outside the scope of shared-tenancy contracts and would be retained under the new system.
     But if any “resource rent taxes” or “excess profit taxes” on the proceeds of mining or drilling
were to be devolved to the States in consequence of the Henry review, such taxes would be eliminated
under shared-tenancy contracts, for three reasons. First, they are officially called taxes. Second, they
add to compliance costs, the elimination of which is a major goal of shared-tenancy contracts. Third,
they are variants of income tax, which is normally regarded as a true tax, and which is applicable even
if the income in question happens to come from land or other natural resources.


8.4    Assessing the rent
Values of sites are routinely assessed for the purpose of municipal rating. Licenses, if tradeable or
rentable, can be valued by recording market transactions. Taxi plates, for instance, are both tradeable
and rentable—or if not are easily made so by some judicious deregulation. If a certain license is
already rented from the State under a competitive bidding system, the State is already collecting
100% of the rent. Does that mean an additional rent fraction can be negotiated under a shared-tenancy
arrangement? Yes, because an entity that does not pay tax on the proceeds of using the license will be
able to bid more for the license itself, and will need to do so in order to beat other bidders in the same
situation. If “all taxes come from gross economic rent,” the rent paid by taxpayers is net, not gross.
    In some cases it might be convenient for an asset owner to pay shared-tenancy rent based on
its own valuation of the asset, with the proviso that the same valuation shall apply if the asset is
compulsorily acquired—this proviso being an obvious deterrent to undervaluation. Prospectuses and
reports to shareholders are further sources of valuations in which owners or their agents estimate
values of assets and have an incentive not to understate them.
    Details not explained here are nevertheless within the competence of professional valuers and, in
disputed cases, the courts.


8.5    Tax base “competition”
A voluntary shared-tenancy scheme in lieu of State taxes could coexist with a similar scheme in lieu
of Federal taxes, involving the same assets. While each government’s tenancy share by itself would
cut into the market rent that entities would bid for a particular asset, the corresponding tax exemption
by itself would increase the rent that entities would bid, and the two effects would roughly cancel out:
“all taxes come from gross economic rent.” The effects on the capitalized values (sale prices) of the
assets would similarly cancel out: while the fair price of a site-like asset is the capitalization of its
net rental value, it makes little difference whether that net rental value is “net” of tax or “net” of rent
payable to a public co-tenant.


8.6    Additional taxes for times of emergency?
If “all taxes come from gross economic rent,” then gross economic rent is the whole revenue base, and
any attempt to extend the base to the rewards of labour or capital—let alone more nebulous concepts
such as “income” or “consumption” or “property”, each of which includes the returns to more than
one factor of production—is futile.
18                                                                                        Prosper Australia


    It follows that when governments increase taxation in times of “emergency”, they are effectively
expropriating additional fractions of the values of site-like assets, whether they admit it or not. But by
admitting it, they can avoid deadweight costs and compliance costs, both of which impair the capacity
to deal with the perceived emergency.


9        Advantages for particular interest groups
9.1      Accountants, tax lawyers, realtors, conveyancers
A population contemplating optional rearrangements of its tax affairs would obviously generate much
business for the professionals who facilitate such rearrangements or give advice thereon. Much of the
demand would come from property owners, who would want to support the new system in order
to profit from increased expenditure on infrastructure, but who would then need to rationalize their
holdings, either generating income from each property or selling it to someone who will. This would
be a bonanza for the property-transaction and property-management industries.

9.2      Enterprises
Payroll tax is a marginal cost and therefore must be recovered through prices if an enterprise is to
grow. This obviously impedes growth. By accepting a shared-tenancy contract, an enterprise could
replace this marginal cost with a fixed cost (rent) and thereafter grow without the need to recover
extra tax through prices. This, together with the elimination of compliance costs, would be a clear
advantage in the contest for market share.

9.3      States, nations; “historical inevitability”
The advantage for enterprises indicates that if a state offers shared-tenancy contracts in lieu of taxa-
tion, the take-up of that offer will be rapid. Because shared-tenancy rents would not feed into prices,
including prices of exports and of products that compete with imports, a state with a high percentage
of entities under shared-tenancy contracts would have a competitive advantage over states with only
conventional tax systems. The policy of allowing shared tenancy in lieu of taxation would therefore
spread rapidly from state to state, both intranationally and internationally.


10        Recessions and financial crises
10.1      Prevention
It is well known that the “Global Financial Crisis” began with the bursting of the U.S. housing bubble.
Of course a so-called “housing bubble” or “property bubble” is actually a land bubble. Buildings,
whose values are limited by construction costs and depreciation, are not worth speculating on. But
sites appreciate in line with capacity to pay; and in a rising market, rational expectations easily give
way to belief in the greater fool, until the market runs out of greater fools.
     It is not so well known that in about 80% of the countries that subsequently entered recession, the
onset of recession was preceded by a collapse in the domestic property market.6
     6
     G. R. Putland, “From the subprime to the terrigenous: Recession begins at home”, LVRG Blog, Jun. 1,
2009; http://blog.lvrg.org.au/2009/06/from-subprime-to-terrigenous-recession.html . (An update to this item is
in preparation.)
Financing the State of Victoria without Taxes                                                          19


    The recessions of the mid ’70s, early ’80s and early ’90s in the UK and Australia followed the
same pattern, as did the so-called Asian Financial Crisis of 1997, and every major U.S. recession
since 1800, including the Great Depression.
    By late 2008 it was clear that Australia’s housing bubble had burst. The Federal Government,
with its First Home Owners’ Boost, created a new bubble at the bottom of the market in a desperate
attempt to avoid a full-scale collapse. The attempt will fail as soon as the Boost is withdrawn. And
of course the Boost did nothing for the commercial/industrial property market, which peaked at about
the same time as the residential market.
    So we see that preventing recessions is largely a matter of preventing boom-bust cycles in the land
market. Wild swings in land prices occur because of contradictory price signals. When a bubble
is inflating, high prices by themselves deter buyers; but rising prices attract buyers by (seemingly)
promising “capital gains”, negating the correction that should be provided by high prices. After the
bubble bursts, low prices by themselves attract buyers, but falling prices deter buyers by threatening
“capital losses”, negating the correction that should be provided by low prices. So the market over-
shoots in both directions. To prevent this, one must attenuate or counteract the signal sent by the rate
of change of prices.
    The obvious solution is a holding charge on values of sites: rising prices mean rising holding
costs, which deter purchases and encourage sales, while falling prices mean falling holding costs,
which encourage purchases and deter sales. “Land tax” satisfies this prescription. Rents payable
under shared-tenancy agreements would also do the job. In so far as they would be payable by owner-
occupants and owners without tenants, they would feed back negatively on prices; and in so far as
they would be payable by tenants, they would feed back negatively on market rents, hence prices.

10.2    Recovery
If the bubble has already burst, reducing the deadweight cost of the tax system will reduce the severity
of the ensuing recession or, if the recession has already started, accelerate recovery. Allowing people
to opt out of the tax system altogether, as proposed here, is a politically safe way to reduce deadweight.
The ensuing removal of taxes from the prices of exports and import replacements would further assist
recovery.


11     Conclusion
We have noted in passing that investment in infrastructure would be greatly facilitated if all existing
taxes on property transfers (including stamp duty, development levies and the GAIC) were replaced
by a single transfer charge payable by the vendor and proportional to the real increase in the site value
since acquisition. This change would yield clear economic and political benefits for comparatively
little political risk.
     But greater benefits could be obtained for even less political risk by allowing each Victorian
taxpayer to opt out of the tax system altogether, on the condition that the State shall be a co-tenant
of each site-like asset occupied or used by the former taxpayer. The take-up of this option would be
rapid as both taxpayers and the State would be keen to eliminate deadweight costs. The remaining
deadweight costs would fall in synchronism with the number of entities remaining in the old tax
system. Thereafter, the State would finance its expenditure not from taxation, but from rent shares,
which the State would effectively have purchased by giving up its taxing powers.

								
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